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Role of Equity Markets in

the Economy
Presentation by

Vikram Sampat

MET, Mumbai 4th December 2009


Role of Equity Markets in the
Economy
• GDP & GDP growth

• Consumption & savings

• Composition of the Indian economy

• Saving in the Indian economy

• Introduction to equity markets


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GDP & GDP growth

3
What is GDP
GDP $ trillion
World $ 69.7 trillion

16 14.2
14
12

 GDP: Gross Domestic Product 10


8
6 4.9

 Measure of country’s income


4.3
3.7
4 2.9 2.6 2.3
1.6 1.6 1.6 1.4 1.2
2

 Contributed by various sectors


0
y
an hina an nce ly il ia ain da dia
SA p U
K
Ita az ss a
U C er m Fra
r
Sp an In
Ja B Ru
C
of the economy
G

 Agriculture Per Capita GDP


'000 $ per person
 Manufacturing 50 47
44 43
38
 Services 40

30

 Per capita GDP - measure the 20


9
10

income per head of a country


3
1
0
Un G Un Ja W Ch In
ite er ite pa or ina dia
d m d n ld
St an
y K ing
at
es do
m

Source: Wikipedia

GDP is the most important measure of a country’s well being


GDP growth
 While absolute GDP is
important, growth in GDP is
also vital
 Growth in GDP signifies
progress
 Rising standard of living
 Employment growth
 High consumption
 Provide positive economic
climate
 Japan vs. India
GDP growth indicates an economy’s progress Source: The economist
Consumption & savings

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Consumption &
Savings
 Two choices about money -
consume or save
 It is the same for an economy
 Consumption -
 Current benefit
 Directly leads to income
 Savings
 Canalize money to industry
 Leads to asset creation
 Increases capital goods demand
 Generates future income

Prudent mix required between the two Source: The economist


Dilemma -
Consume or Save?
 GDP growth happens when -
 individuals earn higher income US per capita income +
 Individuals consume more GDP growth + consumption
as % of GDP
 Real assets are created
 Stagnant economies (stable
populations and income)
 Increasing pressure to
consume
 Lower capacity creation
 Growing economies
 Growing consumer base
 Higher investment propensity
Mix dependent on economic climate
Consumption patterns

 As economies mature
USA

 Population & incomes stabilise


 Consumption as % of GDP rises
 This caps the economy’s growth
potential
US – low growth potential
India – high growth potential
US growth trajectory

 US economy - 1929 to 1999


USA
 Growing population
 Growing per capita
consumption
 Acceptable savings rate

USA capitalised on strong fundamentals to emerge as world leader


India - 2009

 India - 2009
 Growing population
 Growing per capita consumption
 High savings rate
 Favourable demographics

India is similarly poised as USA was in 1929


China – in a league of its own

 China
 Very low consumption
 Growing per capita consumption
 High savings rate
 Fnfavourable demographics

Demographics will compel China to shift to consumption led growth


Savings patterns  India & China
 Rising share of savings
 Households dominant in India
 Corporates significant in China
 In Korea, Govt sector emerging
 China will increase consumption
soon
Stages of economic development
Savings – Investment balance
 Growing economies
tend to invest more
 In maturing economies
investments taper off
 As economies mature,
investments decline
due to declining
opportunities
Composition of the Indian
Economy

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Concept of ICOR

 Additional capital required to generate one


additional unit of output (GDP)
 For India, from empirical evidence ICOR is 4.
 $4 of investment yields an increase of $ 1 in GDP
 Current savings rate is around 32%. For GDP to
grow by 1% point, savings rate needs to rise by
4% points of GDP
 This increase can be either through domestic savings,
overseas investments or remittances

Focus on increased savings rate as a means of higher GDP growth


Indian GDP growth

 Investments growing significantly faster than


consumption
 Robust GDP growth for India since 2004
India riding a growth wave
Contributors to Indian GDP

 Investments have had the largest impact on Indian GDP


growth over last 5 years
 Investments - savings canalized into long term assets
 Corporates play a crucial role in the economy
Corporates play a crucial role in asset creation
Savings in the Indian
Economy

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Savings & Investments

 Households sector create financial savings


 Financial intermediaries route the savings into economy
 Private and public sector convert investments into assets

Savings are routed to investments by financial intermediaries


Savings – Investment balance

 Over 30% of GDP routed for capital formation


 Public and private sector use the savings created by households
Capital formation essential for sustained economic growth
Indian savings mix
 Indian savings skewed
towards debt -
 Small savings by large
proportion of population
 Lower risk propensity
 Low understanding and
accessibility to equity &
MF markets
 Equity markets gaining
popularity of late

Indian savings need to be more efficient


Debt v/s Equity
CAPM

 High inflation erodes returns from debt


 Higher returns have higher associated risk
 Investors need exposure to equity markets to earn
reasonable / acceptable rates of return
Increasingly, a growing number of investors taking equity exposure
Introduction to equity
markets

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Concept of equity investments

 Equity stakeholders are owners


 Sharing of risk
 Sharing of rewards
 Allow the size of companies to grow well beyond individual
or family capabilities
 Allow returns to shareholders significantly above debt
 Allow household savings routed to business and economic
growth

Essential for a vibrant economy


Types of equity markets
 Primary markets
 New issues market
 Routes savings of the economy to the corporate sector
 Role of financial intermediaries
 Private equity markets
 Share issue of unlisted companies
 Routes savings of the economy to the corporate sector
 Role of financial intermediaries
 Secondary markets
 Trading on exchanges
 Provide liquidity to investments
 Facilitate market determined prices for securities

Vibrant equity markets indicate progressive economy


Players in equity markets

 Primary markets
 Company
 Lead manager and other intermediaries
 Investors
 Secondary markets
 Stock brokers
 Investors
 Analysts
 Stock exchanges (BSE / NSE)
 Depository and Depository participant (NSDL)
 Regulator (SEBI)

Large market players involved in equity markets


Size of global equity markets
 Large & significant Total World Market capitalisation versus GDP
in USD trillions

 Global market cap – over $ 40 70


trillion 60
50
 2008 Market cap - $ 61 trillion 40
30
 Comparable to global GDP 20
10
 2008 new issues - $ 1 trillion 0

 Very active market

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06
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 Annualized turnover of $ 82 Total World Market capitalisation World GDP

trillion in 2009
 $ 113 trillion in 2008 Average daily turnover
 53 large & active stock (USD trillions)
exchanges globally  Equity – 0.25
 Forex – 4.0
Most important financial market globally  Bonds – 0.03
Global equity markets

 Led by USA and Europe


 Emerging nations are catching up
Systems wise, India is the most sophisticated equity market globally
Size of Indian equity markets
 Large & significant
 2008 BSE Market cap - $ 650 Billion

 Very active market


 NSE: Daily turnover of 15000 Cr in Cash market & 65000 Cr in
F&O market
 30 stocks on BSE & 50 on NSE
 22 stock exchanges in India
 Over 5000 listed companies
Indian equity
markets
 Growing steadily -
 Secondary investors –
FIIs/MFs
 Primary markets – new
issues
Thank You

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